Baofeng Energy to Build 3 More Coal-to-Olefins Plants

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Baofeng Energy to Build Three More Coal-to-Olefins Plants Author/Source: Daily Economic News Date: 2019-06-26 Clicks: 36 Although it primarily uses coal as a raw material to produce olefins and other fine chemical products, Liu Yuanguan, the president of Baofeng Energy (600989, SH), prefers to describe the company as a manufacturer of coal-based new materials rather than a coal chemical enterprise. “We are a high-end coal-based new materials company. ”Recently, Liu Yuanguan emphasized in an interview with a reporter from the Daily Economic News. As a new stock listed in May this year, Baofeng Energy currently has a total market value of nearly 90 billion yuan. At present, Baofeng Energy already has an olefin production capacity of 600,000 tons per year. It plans to use the funds raised to build another olefin production facility with an annual capacity of 600,000 tons. The company aims to establish three more olefin production units over the next 3 to 5 years, thereby achieving an overall olefin production capacity of 3 million tons per year. It also intends to pursue a strategy focused on high-end and differentiated products, and it does not rule out expanding its operations in the field of fine chemicals through mergers and acquisitions. Liu Yuanguan said that coal is the company’s main raw material, while chemicals are merely used as production tools; the company’s final products and main sources of profit come from olefin products such as polyethylene and polypropylene. In the future, the company will continue to introduce new technologies, improve the fine chemical industry chain, and move forward in the direction of coal-based new materials. Talking about the olefin industry: Market competition will drive survival of the fittest. In the western part of China, the \"Golden Triangle\" region comprising Ningdong in Ningxia, Yulin in Shaanxi, and Ordos in Inner Mongolia boasts abundant coal resources, and has gradually given rise to a remarkable modern coal chemical industry cluster. Baofeng Energy is located in the core area of the Ningdong Energy and Chemical Industry Base. Currently, focusing on the modern coal chemical industry, Baofeng Energy has planned and built the largest coal-based new materials circular economy industrial park in China. “Our country is a typical case of being ‘rich in coal, short of oil, and lacking natural gas’. Using coal as a raw material for the production of chemical products offers various advantages. ”In Liu Yuanguan’s view, using coal as a raw material instead of oil can alleviate China’s heavy reliance on oil imports. On the other hand, using coal as a raw material to produce high-end chemical products not only doubles the value of coal, but modern coal chemical industries can also reduce carbon dioxide emissions significantly compared to using coal for power generation, thereby facilitating the green development of the industry. In 2018, Baofeng Energy’s gross profit margins for the olefin products (mainly polyethylene and polypropylene) and fine chemical products manufactured from coal as raw material were 43.16% and 43.56%, respectively. Historically, the price of olefins in the domestic market once reached 20,000 yuan per ton, but it has declined in recent years. Recently, olefin prices have first risen and then fallen; the average price of polyethylene has dropped from 10,740 yuan per ton to around 8,000 yuan per ton at present, while the average price of polypropylene has fallen from 10,341 yuan per ton to around 9,000 yuan per ton currently. Liu Yuanguan believes that the recent decline in olefin prices is not a bad thing. “It may have an impact in the short term, but it’s a good thing in the long run. ”It stated that market competition will drive survival of the fittest in the industry, and Baofeng Energy has cost advantages, which will make it stronger after the industry undergoes reshuffling. It is reported that there are currently two main methods for producing olefins in China: one uses crude oil as raw material, and the other uses coal as raw material. According to Boston Consulting Group’s calculations, when the price of crude oil is 55 dollars per barrel (the current price of Brent crude is around 65 dollars per barrel), the direct cost of producing olefins from oil is 6,955 yuan per ton ； Among the companies that use coal-based olefins, China Coal Energy’s direct cost is 6,083 yuan per ton, Shenhua Ningmei’s is 5,571 yuan per ton, and Baofeng Energy’s is 4,629 yuan per ton. In contrast, Baofeng Energy has an advantage in terms of costs. On development strategy: Continued investment in high-end products and fine chemicals. In recent years, Baofeng Energy has seen good growth in its net profit. In 2017 and 2018, the net profit attributable to the parent company’s shareholders was 2.923 billion yuan and 3.696 billion yuan respectively, representing year-on-year increases of 70.12% and 26.41%. In the first quarter of this year, the company’s net profit attributable to shareholders of the parent company reached 1.02 billion yuan, a year-on-year increase of 24.93%. “We are still very confident about the future development of the company. ”Liu Yuanguan told a reporter from the Daily Economic News that Baofeng Energy’s second-phase project, which involves the construction of an olefin production facility with an annual capacity of 600,000 tons, is expected to be completed and put into operation in July or August this year, while the methanol production facility with an annual capacity of 2.2 million tons is expected to start operating in November this year. By then, the company will have new drivers for performance growth. In recent years, the domestic e-commerce and logistics industries have developed rapidly, leading to an increase in demand for polyethylene products. However, China still needs to import large quantities of polyethylene and polypropylene products, resulting in a significant capacity gap. According to data from the General Administration of Customs, in 2018, the shortage of domestic polyethylene resin amounted to 14.0245 million tons, while the shortage of polypropylene resin was 3.2796 million tons; these shortages increased further compared to 2017. Polyethylene products have a wide range of applications; they can be found in things such as plastic bags, packaging for deliveries, and pipe manufacturing, as well as in automotive interiors and the aerospace industry. However, according to the reporter’s understanding, polyethylene products in different fields have different grades. The prices of polyethylene products of different grades often vary significantly, with some differing by over a thousand yuan per ton. “The olefin products produced in our Phase 2 project are different from those of Phase 1. The metallocene polyethylene produced in the second-phase project costs several hundred yuan more per ton than that produced in the first phase. ”A representative from Baofeng Energy told reporters from the Daily Economic News that, compared to the products of the first phase, the olefin products of the second phase have significant advantages in terms of various performance characteristics, and can be used in fields such as the manufacturing of large-scale pipelines. The second-phase products are high-end olefin products, for which the import dependence currently stands at around 80%. “In addition to strengthening the olefin industry through high-end products, the company also needs to accelerate its development in the field of high-end fine chemicals. ”In Liu Yuanguan’s view, Baofeng Energy still has much room for improvement in the field of fine chemicals. In the future, the company will strengthen its R&D team and introduce and apply advanced technologies to improve and expand the fine chemical industry. The company has established an investment and M&A team that focuses on fine chemical and high-end material projects around the world, and it is not ruled out that it may increase its involvement in the fine chemical sector through acquisitions in the future.